Meet the Author

Ben R. Craig |

Senior Economic Advisor

Ben R. Craig

Ben Craig is a senior economic advisor in the Research Department. His principal fields of activity are the economics of banking and international finance.

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Meet the Author

Matthew Koepke |

Research Analyst

Matthew Koepke

Matthew Koepke is a former research analyst in the Research Department of the Federal Reserve Bank of Cleveland.


Economic Trends

Loans and Leases in Bank Credit

Ben Craig and Matthew Koepke

The U.S. economy has shown many signs that it is on the mend from the most severe economic contraction since the Great Depression. However, the economy is still facing headwinds on its way to recovery. One significant headwind that is preventing a more robust economic recovery is the challenging lending environment. The financial crisis and the accompanying recession from 2007–2009 resulted in a significant decline in loans and leases in credit, much more than occurred during the previous two recessions. Moreover, it has taken longer for lending activity to recover in this business cycle relative to the 1990–1991 and 2001 cycles. Given the depth of the declines in loans and leases on banks’ balance sheets and how long it has taken lending markets to recover, it is likely that the economic recovery will remain subdued until credit market conditions improve.

Loans and leases in credit tend to be a lagging indicator due to the time it takes for old loans to be paid off and for banks to reduce lending activity. The 2007–2009 recession saw a significant decline in loans and leases in bank credit. The largest year-over-year decline in loans and leases in bank credit occurred in October 2009 (9.56 percent). In comparison, the largest year-over-year declines of loans and leases in bank credit that occurred as result of the 1990–1991 and 2001 recessions were 0.67 percent and 0.65 percent, respectively. Given the deeper decline in loans and leases in credit in the 2007–2009 recession, it is likely that it will take much longer for credit markets to return to return to normal levels than it did during the previous two business cycles.

Since lending is a lagging indicator, it is better to examine the change in lending from the trough of the recession than from the peak. The current level of total loans and leases, as a percent of their trough level, remains much lower (96.4 percent) compared to the 1990–1991 and 2001 recessions. During the 1990-1991 and 2001 recessions, the levels of loans and leases in credit 80 weeks after the troughs were 99.6 percent and 109.8 percent, respectively. While it appears that loans and leases in credit increased dramatically 40 weeks after the recession trough, most of the increase in loans and leases in credit was attributed to a change in how banks account for consumer credit card accounts and not new lending. Given the fact that the majority of the increase in loans and leases in credit is attributed to an accounting change and not new lending, it is apparent that the recovery in lending has been much slower in this cycle than the previous two cycles.

The severity in the decline of loans and leases in credit during the 2007-2009 recession compared to the previous two recessions is most apparent in the commercial and industrial (C&I) lending segment. In the 1990–1991 and 2001 recessions, 80 weeks after the business cycle troughs, the levels of C&I lending were 94.1 percent and 89.3 percent of their trough levels, respectively. However, the current level of C&I lending is only 82.7 percent. While all three recessions saw a decline in C&I lending at the trough of the business cycle, the 2007–2009 recession resulted in a much more severe contraction in commercial and industrial lending.